Q2 Earnings: 3 Answers From Lumber Liquidators

For those of you who thought Lumber Liquidators (NYSE: LL  ) would finally pull back with the company's earnings announcement this week, think again.

Bullish investors reigned supreme once again as shares of the hardwood flooring specialist closed up nearly 7% Wednesday after the company crushed analysts' expectations with its second-quarter report.

So why is everybody so excited today?

Luckily, I posed three questions for Lumber Liquidators last week going into the announcement to help us sort out the results, so let's see what the retailer had to say:

On growing into its valuation
First, I noted last Friday that the stock was trading at 44 times last year's earnings and 72 times free cash flow, so I was worried the company might not be able to grow into its valuation even if its results were solid.

Even so, I also remembered that doubting the company's incredible growth potential has proven a dangerous game over the past year, and this quarter proved no different.

More specifically, net sales increased an impressive 22.2% from the year-ago period to $257.1 million (compared with analysts' expectations of $243.3 million), helped by strong comparable-store net sales growth of 14.9%.

Better yet, net income increased a whopping 67.7% over the same period to $20.4 million, or $0.73 per diluted share, versus estimates that called for earnings of $0.60 per share.

Even better yet, Lumber Liquidators once again raised guidance for both its full-year revenue and earnings per share, telling investors they should now expect to see sales in the range of $940 million to $963 million, and EPS between $2.45 and $2.60. For those of you keeping track, that's a 2% to 3% boost over its previous revenue range, and 10% to 16% higher than the company's earlier earnings forecast.

On sustainable long-term margin expansion
While it was a safe bet that most investors expected sales to continue increasing,Lumber Liquidators also told us last quarter it was in the middle of a multiyear operating margin expansion, which helps more of every revenue dollar translate to the company's bottom line.

Sure enough, Lumber Liquidators' gross margin increased to 41.3% in the second quarter of 2013, reflecting a combination of lower product costs, increases in the average retail price per unit sold, and streamlined efficiency across the business as a whole. As a result, operating margin rose 350 basis points from the second quarter of last year to 12.9%, helping drive that impressive aforementioned net income growth.

In short, Lumber Liquidators seems to be firing on all cylinders, and old efficiency woes seem to be firmly in the past.

On questionable product safety
Finally, I was hoping Lumber Liquidators might give us some color on recent allegations regarding product safety violations in some of the company's most popular offerings. 

While its press release didn't specifically address these concerns, CEO Robert Lynch did take a few minutes near the end of the company's subsequent earnings conference call to circumvent the issue and discuss what goes into determining the quality of its products.

First, Lynch noted, Lumber Liquidators not only sources products directly from the mills which make them -- a key competitive advantage in its business, allowing it to offer lower prices versus the distributor models adopted by larger competitors like Home Depot and Lowe's -- but it also often purchases the majority of the mill partners' capacity due to the scale of its operations. As a result, this affords Lumber Liquidators unparalleled "insight and visibility throughout the sourcing process."

In addition to "well-designed product specifications," then, Lynch also reiterated that Lumber Liquidators follows a "strict adherence to a set of internal standards set well above regulatory requirements," and that "because of these standards the products we sell nationally exceed the most stringent requirements of any state."

Lynch went on to elaborate on his company's other quality assurance efforts, including "more than 60 professionals around the world ... who perform and monitor those processes that we believe are most effectively executed on the ground at the mill," as well as additional testing in Lumber Liquidators' labs and in independent certified facilities.

Of course, this doesn't mean Lumber Liquidators is completely off the hook yet, but shareholders should rest well knowing their company recognizes that the perceived quality of its products is integral to the success of the business.

Foolish takeaway
All in all, Mr. Market is right to be pleased with another solid quarter from Lumber Liquidators. With all things considered, then, and barring any significant issues with regard to the product safety issues above, I see no reason Lumber Liquidators stock won't continue to outperform the broader indexes for now.

Then again, you should also remember Lumber Liquidators is just one of many great growth stocks our market has to offer.

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